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Our view

Verizon is one of the world's largest telecommunications groups. Operations are focused on the US, but there's a wide UK shareholder base, after it bought Vodafone out of a joint venture with a shares-plus cash deal in 2014.

Verizon has restructured itself this year into three segments. The two main operating segments are Consumer and Business, with Corporate and Other picking up what's left over.

Consumer is by far the larger of the two primary segments, accounting for over two thirds of group revenue. It provides wireless and landline services directly to individuals and via wholesalers. It also sells tech such as smartphones and laptops. The Business segment generates just under a quarter of revenue and provides similar services to companies and government organisations.

More broadband connections, and increasing demand for smartphones, have so far provided a favourable backdrop to the group. The roll-out of 5G could end up being the "secret sauce" that helps the Internet of Things and other applications live up to their potential.

Falling debts mean the balance sheet is in good shape, and earnings and cash flows both look reasonable to us. The group's managed to find $5.7bn of cumulative savings since a $10bn plan was announced in 2018. That's helped support the dividend, and the shares offer a prospective yield of 4.1%.

However, it's no one way ticket.

The landline operations aim to surf the wave of higher speed internet, but established internet and landline services are in decline. This is already pushing the operations to a loss, and significant business-to-business sales mean fortunes are closely tied to those of the US economy. Mobile is a more reliable end market, but it's notoriously competitive.

What's more, with governments finding ways to squeeze more out of spectrum auctions, we wouldn't be surprised to see it having to fork out significant sums on 5G in the not-so distant future. That would be on top of the everyday maintenance of its sprawling asset base. Capital expenditure has averaged $17bn over the last 3 years, and is set to increase.

For now Verizon looks in reasonable financial shape, and the potential to provide the infrastructure behind a new age of connectivity is a clear attraction. But investors shouldn't forget it'll come with lofty demands on cash that would otherwise be finding its way back to shareholders.

Third Quarter Results

The Consumer segment grew revenue 1.4% to $91.1bn, driven by an increase in mobile and fiber-optic revenues and offset by a decline in wireless equipment and copper based services. Service revenue increased 1.8% to $65.4bn and Equipment revenue declined 4.4%to $18.0bn. Operating profit rose 3.4% to $29.0bn as margins improved 0.6 percentage points to 31.8%.

The smaller Business segment saw revenues shrink 0.3% to $31.4bn, despite adding devices in the final quarter. Sales in the Global Enterprise division fell 3.4% to $10.8bn, while Small and Medium Business sales rose 6.6% to $11.5bn. Operating profit fell 9.7% to $3.8bn as margins fell 1.2 percentage points to 12%.

Full year capital expenditure was $17.9bn, and is expected to be between $17bn and $18bn in 2020 as the group invests in 5G, 4G and fiber capabilities.

The group's net debt position improved slightly, and currently sits at 2.3x underlying cash profits.

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